Risk Retention: Innocents Abroad

April 11, 2018 - The US market has been happily absorbing the end of risk retention, but the same cannot be said of Europe. To that end, at IMN’s 5th Annual Investors’ Conference on European CLOs and Leveraged Loans, LSTA General Counsel Elliot Ganz participated in a panel on the divergent regulatory environments in Europe and the United States. The panel was moderated by Ganesh Majendra of Integer Advisors and included David Quirolo of Cadwalader and Nick Voisey of the LMA. Mr. Ganz started things off with a brief review of the LSTA’s recent court victory on risk retention, explaining what it meant (no more risk retention for US CLO managers); how we got here (it wasn’t easy) and what comes next (probably nothing new on risk retention other than some regulatory clarifications). Mr. Quirolo then wondered whether those clarifications might include whether the SEC would consider European CLOs that rely on the “originator option” subject to US risk retention. Under that option managers purchase on their balance sheets 5% of the loan portfolio and then transfer the loans to the CLO after about 15 days. The issue hinges on whether the SEC thought such a token transfer remain within the definition of “securitizer”; i.e., the party that originates a securitization by transferring assets. Mr. Voisey then reviewed the challenging road for EU CLOs which are still subject to risk retention. He argued that avoiding recent EU Parliament proposals to increase the risk retention requirement to 20%, while not quite as satisfying as the LSTA’s victory, was as important a result. He and Mr. Quirolo assured the audience that their efforts are continuing but warned that the road ahead remained challenging. The panel then touched on a number of other issues such as leveraged lending and Volcker. Mr. Voisey noted that the EU regulators were treating the guidance as such, and not as a rule, whereas Mr. Ganz reported that the U.S. banking agencies, at least until recently, seemed to be taking a much more stringent approach. He also warned that reports that the US leveraged lending guidance are dead are quite premature; while the agencies seem open to taking a fresh look at them, they are likely here to stay. Finally, Mr. Quirolo discussed Brexit (short answer: it’s a mess) and Mr. Voisey added that anyone who believes that post-Brexit UK financial regulators will be easier than EU regulators is in for a surprise.